Vancouver Commercial Real Estate Podcast

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September 8, 2021
VCREP #18: Is the Retail Cannabis Business Riding HIGH? with Jeff Prete

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The legalization of cannabis has sent shockwaves through the retail landscape with the prohibition of new retail opportunities for cannabis operators. This week, Jeff Prete, President of Jima Cannabis, unpacks the impact the cannabis business has had on retail in Vancouver and throughout the province. Ever wonder how long it takes to get a store open, how much capital you need, and if the stores are even that profitable? The answer Jeff gives might surprise you.

Grab a bag of chips and your favourite chocolate bar and sit back relax and enjoy this week’s episode!

Please tell us about yourself.

I like to find solutions. Off the foundation of technology, I’ve been chasing solutions throughout my career. In the cannabis space, solutions are needed because there is a lot of stigma, and many challenges and regulations. I use tech to help develop the strategies and tactics we need. The creativity in finding solutions is about seeing opportunity in challenge and finding your way through.

What have been the challenges along the way for cannabis companies?

Like you said, 10-12 years ago, no landlord wanted a liquor store as a tenant. And that’s due to the extreme behaviours that can come from liquor, like noise and alcoholism. But those are fringe behaviours we see in the media. However, 95% of all Canadians consume alcohol.

It’s the same with cannabis. There’s a stigma. And that stigma sticks to the product, the people and the business. Cannabis is highly regulated and it’s hard to get into licensed cannabis. But just because it’s federally legalized doesn’t mean that everyone is on board. So you have to go above and beyond to break down those stigmas and barriers.

But we’ve proved that, like liquor, cannabis is recession-proof and pandemic-proof. We’ve grown through Covid. So as a landlord, why would you not want a company like that?

The early, illicit/unlicensed market ran the gamut between high and low end. They weren’t legal, but they paid their rent. But enough landlords and communities got burned by these places. So now with licensed businesses, there are a lot of key players you want to keep happy.

What is the process for getting a store licence?

This changes by province. Within BC, I have to first find a location that is free and clear of setbacks. Some setbacks are clear and others are more vague. Then you have to secure a lease with a landlord but you need an out, in case you don’t get the licence. With that lease, you can submit an application to the province. It’s a very extensive application process.

While that’s going on, you’ll get an approval in principle by the province. The province then continues on with their security check until they’ve decided they can work with you. That can take years. For us, it was close to nine months to go through this process.

So it’s 6-12 months just to get through the province. Then the municipality will need to look at zoning, public hearings, and any other concerns. You won’t know if you can have a store until the province and municipality approve you.

Then you do your construction, get an inspection, and get your business licence. You have to pay a cannabis premium on your business licence. It used to be $30,000 per year in Vancouver, but that’s been lowered now. There’s a premium at every point for cannabis businesses due to fear, uncertainty and doubt.

So it will cost you about $400,000 both in time and dollars to get through the process. You have to hold a lease, you’re carrying rent and payroll, you have to have insurance, you have to submit plans, etc. You also have to invest in the interiors to provide the desired experience.

How many stores actually make it from application to opening?

For our model, it was one in three. For every three locations I submitted for, we would get one. We actually do a bit better than that, because I put in the time and effort to look at setbacks and work with municipalities before I submit. We do our research before securing a lease.

When it comes to cannabis licensing, there are guidelines, not rules. So they’re subject to interpretation and adaptation.

Are some municipalities easier than others to work with?

Yes, some municipalities are more friendly to cannabis than others. There are also municipalities that are more efficient than others, whether you’re cannabis or not. There are different fears and doubts that come into play depending on the local government and the constituents they represent. Each area has its own problems and opportunities.

As a business operator, I like to see one store for every 10,000 people. If it’s below that, I question if I should go in because the market may be too saturated.

We’ve heard of municipalities approving too many cannabis stores purely for taxation purposes, and not caring if they survive. There are a lot of stores in Kelowna so is that a problem there?

The interior has a high degree of store density per capita. It’s a saturated environment. But is it the local municipality’s job to say who should be allowed in? Or is it the province’s job? Or is it the retailers’ job? I don’t know. If it’s the municipality or the province in charge, they need to publish a number so we don’t bother applying when the number is reached. If it’s up to the retailers in the free market, we need to speed the process up so we can adapt and not have such a high barrier to entry.

I don’t want stores to close. That means the business lost money and a landlord has a vacancy. There are impacts to oversaturation and slow rollouts. The process needs to be reformed to align with the purpose and retain value with the retailers.

On building owners and premiums:

Building owners are very influential in BC in this process. The licence is attached to the property; I can’t move my business without severe intervention. If I set up a store and fail, as a landlord, there is value because the building is still zoned for cannabis.

There’s already a cannabis premium with a bigger deposit and a higher price per square foot. But some landlords are also asking for a higher percentage of my top line as a management fee. Cannabis companies can’t afford that.

A well-run business is only at 20% even. Unregulated and unlicensed businesses are a different story. But a good licenced business is at 20%, maybe 30% as the exception. And that’s because the governing body regulates the pricing and there’s a lot of choice for savvy customers. That creates a downward pressure on price which isn’t great for retailers.

How much impact do the government stores have on the private stores?

First I want to say: Well done to Canada for federally legalizing cannabis.

The government controls what suppliers I can buy from in order to maintain quality. They control the menu and all the ingredients. They also set the prices and I can’t sell below what I bought it for. There’s unpredictability in the supply chain and what’s available, which is a challenge. BC Cannabis used to be the only one who could sell online and deliver to people’s homes. On July 15, that changed, so now any independent retailer can sell online. That would have been fantastic to be able to do during covid.

I can only have eight stores in BC but BC Cannabis has close to 30. They’re not serving markets that independent retailers can’t go to; they’re in prime areas and they’re dropping their prices. They also have more influence amongst landlords as they are a more desirable tenant.

It’s an unbalanced playing field with the government stores. They control the supply and demand of how we sell. They’re directly competing against us online and in-store. And they have indemnity like no one else because they’re backed by the government.

The government stores have different access to cash than we do. There’s no lending to independent retailers. None of the banks are lending money to us to build our businesses. You can’t even get a credit card.

How do you operate if the banking system isn’t supporting you?

It’s difficult. Alterna is the bank of Canadian licenced cannabis. They don’t provide credit cards and do have some restrictions, but they’re the main bank for cannabis companies. MerCo was the only choice for early adopters. It’s very limiting and was even harder for those who started three years ago.

Let’s talk about Ontario. Is there a big difference in the process province-to-province?

Yes, there’s a huge difference. In Ontario it’s a two step process. You can apply to do business as a licenced cannabis retailer without having a lease. So the provincial timeline doesn’t hurt you because you don’t have to carry rent, payroll, insurance, etc.

The municipalities in Ontario are in or out. For example, Brampton is in and Mississauga is out on cannabis, so there are no cannabis stores in Mississauga. The municipality gets to say yes or no; they don’t get to say where. The province will determine if the location is good or bad. That’s very different than in BC.

It’s less risky from a financial perspective in Ontario. But there are a lot of stores very close to each other in Ontario. The regulation in BC does help retain some value for retailers longer. There’s a lot of value in having a licence in BC. But in very saturated areas, the value for retailers is decreasing.

Lots of people have a location in mind when they start the process in Ontario. While others wait until they get the retail operator’s licence before they secure a building and a lease. But because you’re trying to reduce the time from application to opening, you may have to carry a lease and start working with a landlord before the licence is received.

On the risks and challenges for landlords and building owners:

A multi-store operator is a different story than a single-store. At Jima, we have the financial means to build out stores, put multiple stores together, and adapt to any changes. We’re also putting together a franchising opportunity for business owners. So I see us as less risky. We’re a safer bet for landlords.

I understand the challenge for building owners and landlords. Banks may decline to refinance for them if they have a cannabis business as a tenant. So you have to refinance your building in advance or not refinance at all. That’s a problem. We are recession-proof and pandemic-proof. Why are you discounting us? Why are you punishing building owners?

I applaud every business owner with a cannabis store as a tenant because they had to go through hell to get us in there. The rules are different for us but they shouldn’t be because we’re federally legalized.

Would it make sense for a landlord to partner with a cannabis company and acquire buildings?

If you have the capital to acquire the building, it makes a ton of sense. You have to be cash-flush but if you own the buildings, there’s money to be made. You will then hold the zoning for cannabis.

Every store that exists is done in partnership. So thank you, building owners. I hope the circumstances change so it’s not so hard for building owners or retailers going forward.

Where does this industry go?

Under current rules and regulations, we are going to get to a point of oversaturation and there will be a market correction. We’ll see consolidation and shrinkage. Value in stores in the next 3-5 years is going down. So you won’t get what you want if you sell.

Long term, we are recession-proof, pandemic-proof, and an essential service. There is long term value. In 10-15 years, policy and regulation will shift. Cannabis will be seen more like liquor. But it’s frothy right now. Coming out of that, you’ll have a different type of investor with deeper pockets and a longer term game plan.

15 years from now, every landlord and strata will want a cannabis company. These companies drive traffic, are reputable, serve the community, increase walk score and safety, and keep cannabis out of the hands of youth. We are the reason why cannabis is less accessible to youth, because of the regulations and guidelines we play by.

10-15 years from now we’re liquor. We are socially acceptable, we’re desirable tenants, and we’re helping to build communities. It will take time. Policy and lending rules will have to change. But we’re just coming out of prohibition now, so I understand the complexity, even if I don’t like it. My job is to understand the rules, adapt where I need to, and wait it out.

What advice do you have for someone looking to get into the retail cannabis industry?

Learn fast and make friends in the industry.

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